Comparing 1987 With 2013 Indicates Stock Crash Trajectory in Place
A couple of months ago I created a chart comparing the year 1987 with 2013 because the relentlessness of the current equity advance caused me to reminisce about that market over 25 years ago [link]. When I investigated the history behind the crash of 1987, whereby equities dropped over 20% in a single day, I was particularly alarmed to discover the reasons behind it.
The crash of 1987 was proceeded by a rise in global interest rates and Federal Reserve chairman Alan Greenspan’s tightening moves. That sounds eerily similar to today’s environment, although interest rates were remarkably high back then. The yield on the 10-year Treasury Bond had increased from 7% to 10% prior to the crash.
The 6% correction in the market last month made it appear the correlation was decoupling, but lo and behold, the market came storming back and the advance through 8 1/2 months is very similar for both years (see chart below).
I’d be surprised if we experienced a one-day crash of similar proportions, however, a significant drop over several months would not be unusual.
Personally I’ve been raising cash in anticipation of a better buying opportunity over the next several months. It will be interesting to see how this plays out.
Click on chart for larger image: